Pace University Lubin School

of Business

International
Banking/ Financial
Markets
Final Examination

Andrey V. Semenov
10.05.2010
Question #1 :

Describe IMF`s recommendations to redesign Financial Regulation – specifically Risk. Do you agree or
disagree ? Why ?

In the last three decades, financial crises (either currency crises, banking crisis, or
simultaneous crises also called twin crisis) increased, becoming a well-known fact of the
global economy. These crises are all the more dramatic for developing and transition
countries, either middle-income countries (like some Latin American and former socialist
economies) or fastened growth countries (like some Southeast Asian economies). In all
likelihood, the link between these problems of EM and the increasing international and
domestic financial liberalization is at the core of the numerous crises. Consequently,
understanding the international capital markets for EM economies is the key for finding
solutions to these problems. Despite this basic agreement, the field intersected by
international macroeconomics, financial economics, institutional design, and developing
studies, does not offer a consensual diagnostic or solution. In the meantime, policy makers
either belonging to EM’s national governments or the International Financial Institutions
(IFIs), make daily crucial decisions in the midst of turbulent episodes.

The recent financial crisis has triggered a rethinking of the supervision and regulation of
systemic connectedness. While there is a clear need to take a multipronged approach to
systemic risk, and a flood of regulatory reform proposals has ensued, there is considerable
uncertainty about how those proposals can be practically applied. Thus, this chapter aims
to contribute to the debate on systemic-risk-based regulation in two ways. First, it presents
a methodology to compute and smooth a systemic-risk-based capital surcharge. Second, it
formally examines whether a mandate, by itself, to explicitly oversee systemic risk, as
envisioned in some recent proposals, is likely to be successful in mitigating it.

Wide range of official, academic, and private sector financial reform initiatives have
surfaced in response to the recent global financial crisis. These include the establishment]
of a specialized supervisor of systemically important firms, refinements in the lender-of-
last-resort principles, new funding liquidity and leverage restrictions for banks, and capital
surcharges based on an institution’s likely contribution to systemic risk.

Several of these proposals suggest that regulations uiding the risk management practices
of financial institutions are in need of significant improvements and, more specifically, that
the focus on the stability of a financial institution in isolation needs to be reassessed. The
proposals also suggest that prudential reform efforts need to be supported by an overhaul
of the current structure of financial regulation.

The introduction of capital charges based on an institution’s contribution to systemic risk

is one
regulatory proposal that has attracted attention. Although it does not necessarily endorse
the adoption of such charges, it illustrates how they can be made operational and at the
same time correct for the procyclicality of these charges, thereby countering a critique
often leveled against the current set of Basel II capital charges—and one that the Basel
Committee on Banking Supervision is now addressing forcefully.

The adoption of capital surcharges and related regulatory measures is likely to represent
an additional burden on the financial sector at a time when capital is scarce, and should
thus be implemented carefully so as to ensure the availability of adequate credit to support
the recovery. Moreover, to fully assess the desirability of surcharges, their costs need to be
contrasted against the benefit of lowering systemic risk and the desirability of other
measures.

At the financial regulatory architecture level, one of the most prominent proposals is the
creation of a systemic risk regulator that would focus on the macro prudential monitoring
of the financial system as a whole. This responsibility could be carried out either by new
regulators or existing regulators with a new focus. While the benefits of strengthening
oversight of systemic risk are considerable, implementation of such oversight may not be
straightforward, as it will require close coordination and clear delineation of
responsibilities between the new and existing (or systemic and nonsystemic) supervisory
bodies. This chapter therefore suggests some key principles that need to be borne in mind
in implementing the oversight of systemic risk. It shows that under an expanded mandate
to oversee systemic risks, regulators will tend to exercise more forbearance against
systemically important institutions than no systemically important ones. This suggests that,
regardless of how regulatory unction’s are arranged, regulators’ toolkits will need to
be augmented to mitigate systemic risks. It is worth noting that there is no one definition of
systemic risk, which IMF defines as the large losses to other financial institutions induced
by the failure of a particular institution due to its interconnectedness.
So now let`s look at that IFM recommendations :

1- Data requirements. The first step in rendering systemic-risk-based charges operational

is the measurement of potentially systemic (direct and indirect) financial linkages. This
requires more
detailed, regular cross-market and cross-border exposures data for individual institutions
that could be reported to relevant data repositories, possibly the Bank for International
Settlements. When necessary to address confidentiality concerns, national laws should be
modified to allow supervisors to fulfill this commitment. At a minimum, national
supervisors could rely on international arrangements— such as the Financial Stability
Board—to share confidential information at restricted forums with the appropriate
safeguards.

2- Procyclicality of systemic-risk-based capital surcharges. It is important that newly

designed systemic-risk based surcharges do not have procyclicality features. The surcharge
designed in this chapter shows how this can be done. Evaluation of alternative
methodologies. In order to advance the debate on how, and whether, to impose systemic-
risk-based capital charges, it is important to draft concrete, practical proposals that can be
reviewed and evaluated.
3- Cross-border issues. Were capital surcharges to be introduced, they would need to be
designed and implemented from a global perspective in order to be effective. The chapter
illustrated some potential problems in designing surcharges for globally active institutions
from a local perspective. The lesson is very relevant for those who oversee globally active
large and complex financial institutions.

4- Communication. To facilitate communication among regulators—within and across

countries—confidential systemic risk reports could be prepared on a regular basis. Such
reports would be an effective and parsimonious way to track institutions deemed
systemically important and their relative ranking.

Most proposals for capital charges will likely accomplish the goal of raising capital buffers
in line with the systemic importance of an institution—an important objective, but one that
does not explicitly show institutions how they can adjust their behavior so as to be less
systemically important. However, more analysis is required to design capital surcharges in
a way that would induce institutions to take into account their spillovers to the rest of the
global financial system. The task is difficult because, among other things, measures of
systemic risk should consider second- and third round effects following a distress event,
and these effects are often beyond the direct control of the institution. Market-based
measures do not allow institutions to trace back their individual effect on systemic risks
either.

Furthermore, financial institutions may respond to the introduction of these surcharges

by attempting to reverse the effects of the regulation (as institutions have attempted to do
through, say, off-balance-sheet transactions) or by attempting to exit the perimeter of
systemic risk oversight altogether. Therefore, it is important to consider the
implementation of capital surcharges in conjunction with other proposals aimed at
lessening systemic linkages (e.g., limiting business activities and channeling derivative
transactions through central counterparties). This is another reason why there is a need to
assess multipronged approaches to mitigate systemic risk. Moreover, all these possible
approaches will require further examination through quantitative impact studies.

So will they succeed …?

Let`s look at that IMF wrote in 2006 before financial crisis

almost crushed entire world banking system :

The international financial system facilitates trillions of dollars of capital flight from
developing and developed countries to onshore and offshore financial centres, with the
active participation of banks and other financial institutions. The consequences are
massive tax evasion, a resultant erosion of state budgets, and rising disrespect for the law.

The international financial architecture must be redesigned. The UN general assembly at

the 2005 world summit resolved to "support efforts to reduce capital flight and measures
to curb the illicit transfer of funds". The relevant international organizations that, working
together, can achieve such a redesign are the IMF, the Organization for Economic
Cooperation and Development (OECD), and the UN.

To confront the problem of capital flight and to help developing countries mobilize
domestic resources and meet the UN's Millennium Development Goals, the IMF should
work with developed and developing countries, in accordance with the March 2002 joint
IMF-OECD-World Bank proposal. Firstly, the Fund should - following OECD
recommendations - encourage international financial centers, both onshore and offshore,
to override bank secrecy (both de jure and de facto) in international tax matters, and to
require automatic reporting of income, in order to facilitate automatic exchange of tax
information.

So they try to redesign it even in 2006 … and that happen next

:
GBP/JPY 01.01. 2005- 04.05.2010 :

Will IMF more lucky now …. Well we`ll see . … but I think
they need more accurate instruments )
Questions #2

World Economic Outlook Report from IMF . What effect have changes in exchange rates ,
changes in commodity prices have on forecasted growth , real GDP , unemployment and
investment opportunities .

“ Let me begin with some good news. The global recovery has evolved better than
expected. We at the IMF now forecast global growth to reach 4.2% in 2010, an upward
revision of 0.3% from our January forecast, and 4.3% in 2011. Alongside growth, global
trade has also shown a strong rebound, and so have capital flows. And, as discussed in the
newly released Global Financial Stability Report, financial market conditions and stability
have improved.
These good global numbers hide however a more complex reality, namely a tepid recovery
in many advanced economies, and a much stronger one in most emerging and developing
economies.
Let me discuss each group in turn.
We forecast growth in advanced economies to be 2.3% for 2010 and 2.4% in 2011. This is
just not enough to make up for the ground lost during the recession. Output for these
countries is now 7% below its pre-crisis trend, and this “output gap” is expected to remain
large for many years to come. Associated with this prolonged output gap is persistent high
unemployment. We forecast the unemployment rate in advanced economies to reach 8.4%
in 2010, and to only decline to 8.0% in 2011.
The main factor behind this weak performance and this prolonged output gap is weak
private demand. In the United States, consumers, who were the drivers of the economy
before the crisis, are being more prudent. In Europe, where banks play a central role in
financial intermediation, the weak banking sector limits credit supply. In Japan, deflation
has reappeared, leading to higher real interest rates, and putting in danger an already weak
recovery.
By contrast, we forecast growth in emerging and developing economies to be much
stronger, 6.3% in 2010, and 6.4% in 2011. Developing Asia is in the lead, with forecasts of
8.7% for 2010, and 8.6% in 2011. Growth appears not only strong but sustainable. While
fiscal policy often played a central role in supporting activity in 2009, private demand is
strengthening, and can sustain growth in the future. “ - Olivier J. Blanchard ( Posted on
April 21, 2010 by iMFdirect)

What's happening is a "multi-speed" expansion, with emerging-market nations generally

moving faster than advanced economies, the IMF said. The broad pattern, though, is that
almost all nations are growing and faring much better than last year.

The "World Economic Outlook" report sees 3.1 percent growth for the United States this
year, while acknowledging large uncertainty for its predictions in the US and elsewhere. If
any continent appears to be the laggard, it's Europe, with many nations still in recession or
with growth so tepid – in the 1 percent range – that recovery is barely discernible.

By contrast, from Latin America to Asia and Africa, developing and emerging economies
are showing solid growth. The performance isn't spectacular, but the clout of rising nations
is visible in this fact: The IMF's overall forecast for global growth (4.2 percent, up from 3.9
percent in January) is substantially higher than the growth expected this year for
industrialized economies such as the US, Japan, or European Union.

Easing of monetary policy, stimulus spending by governments, and regulatory efforts to

defuse problems in credit markets have all played a role in the pickup. Global commerce
has been reviving alongside consumer confidence within many nations.

"The outlook for activity remains unusually uncertain, even though a variety of risks have
receded," the report said.

One prominent risk: Banks in the US and Europe still remain exposed to weak real estate
markets. Also, the IMF said it's possible that "market concerns about sovereign liquidity
and solvency in Greece could turn into a full-blown and contagious sovereign debt crisis."

Although such a crisis may not occur, rising government debt leaves many nations with
little room
to maneuver if the world economy was hit by a new shock. Still, a separate IMF report this
week also shows nations have made some headway in combating the crisis in private credit
markets.
The reports comes ahead of a weekend meeting of the IMF and World Bank, at which
finance ministers will consider ways to make the global economy better insulated from
financial shocks like the crisis of 2008.

Top priorities urged by IMF officials include reform of financial regulation and for
advanced nations to set plans for controlling government deficits over the next few years.
Bu doing that they`ll try to achieve more stable commodity process , more stable growth
and lowering unemployment and incise investment horizons …. At least they`ll
try right . ?)))
Questions #3

3 pages on you favorite Financial Topic :

Well I think… I’ll write about How to make money on stock market
)))

But first thing first , stock market as I see it is a fractal

structure and that do we know about fractal structures … and stock
price move by FEAR and GREED which is underling human nature :

So first thing first that is a fractals ?

A fractal is "a rough or fragmented geometric shape that can be split into parts, each of
which is (at least approximately) a reduced-size copy of the whole," a property called self-
similarity. Roots of mathematically rigorous treatment of fractals can be traced back to
functions studied by Karl Weierstrass, Georg Cantor and Felix Hausdorff in studying
functions that were analytic but not differentiable; however, the term fractal was coined by
Benoît Mandelbrot in 1975 and was derived from the Latin fractus meaning "broken" or
"fractured." A mathematical fractal is based on an equation that undergoes iteration, a form
of feedback based on recursion.
A fractal often has the following features:

It has a fine structure at arbitrarily small scales.

It is too irregular to be easily described in traditional Euclidean geometric language.
It is self-similar (at least approximately or stochastically).
It has a Hausdorff dimension which is greater than its topological dimension
(although this requirement is not met by space-filling curves such as the Hilbert
curve).
 It has a simple and recursive definition.

Because they appear similar at all levels of magnification, fractals are often considered to
be infinitely complex (in informal terms). Natural objects that are approximated by fractals
to a degree include clouds, mountain ranges, lightning bolts, coastlines, snow flakes,
various vegetables (cauliflower and broccoli), and animal coloration patterns. However,
not all self-similar objects are fractals—for example, the real line (a straight Euclidean line)
is formally self-similar but fails to have other fractal characteristics; for instance, it is
regular enough to be described in Euclidean terms.
Closest understanding of stock market structure was in my mind accomplished by Ralph
Nelson Elliott (1871–1948), an accountant who developed the concept in the 1930s. He
proposed that market prices unfold in specific patterns, which practitioners today call
Elliott waves. Elliott published his views of market behavior in the book The Wave Principle
(1938), in a series of articles in Financial World magazine in 1939, and most fully in his
final major work, Nature’s Laws – The Secret of the Universe (1946). Elliott argued that
because humans are themselves rhythmical, their activities and decisions could be
predicted in rhythms, too.
But all Eliot Wave counting was difficult, and kind of lead nowhere … it was too subjective,
nothing was precise to many alternative wave count exist .They was simply too subjective
and difficult to use in real life.
I started the Financial Architecture Int. 6 years ago with
simple and at the same time difficult task - find solution for
analyzing stock market and find way to estimate underling human
behavior patterns. We analyze market from different angles, test
it seasonality, we use reverse modeling..uffff.. I think we try
more than 1000 different algorithms using biosoftware created by
us for exactly that purpose. The idea behind it was quite simple
- if Bern Stern have the mechanic algorithm for the profitable
trading , it`s exist , and if it`s exist we`ll find it . Well ,
long story short - that was one of most difficult tusks that I
ever had … but We find it ;) And most beautiful thing is that
it` will work with any financial instrument , stock , bond ,
Interest Rate Swap , futures , currencies , options …
basically for any financial instruments traded publicly .
We design Intelligent software using self learning algorithm
which give us the most vulnerable points in time there Fear
and Greed of the traders are essentially equal „ the points of
uncertainty .But most beautiful thing are those points of
uncertainty , if you accept fractal structure of the stock
market, became points of estimated certainty .

I’ll give a example that I mean by that:

GBP/JPY 01.01. 2005- 04.10.2010 weekly chart
Sell Signal was given 03.11.2007 @ 234.47 and by shorting just
one contract of with initial deposit (and stop loss in a sense)
$19800 you`ll gaining just simply waiting for next equilibrium
point to occur on 05.12.2009 @ 149.00 :

(234.47-149.00 )*$10 (roughly price of 1 pips of GDP/JPY pare

per contract lev. 1/100) = $85470 (minus transaction costs)
So it`s:

$85470/$19800=4.3167 * 100%= 431.67% on initial investment of

$ 19800
It worth to notice - what result was achieved at the time when
your institutions were collapsing.

On charts:
Green candles - Greed
Black Candles - Fear
 EUR/USD 09.09.2009-05.10.2010

Futures : 30 year treasury bonds expiration Jun 10 :

Futures S&P 500 e-mini USD Sep 10

In a sense we combine stocks with options in the same trading

instrument .Basically Fear and Greed patterns can be seen on any
financial instruments publicly traded, more people trade it „ more
liquidity -better results.

We found that we hope to find ….

So How to make money on stock market?

Well in my opinion if you expect to make money on stock market
you should trade FEAR and GREAD of people, and it is the only
way to have dissent return on your investment.
Also it gives us opportunity to use portfolio theory of
Markowitz but in quite a different way:

The key to Prof. Markowitz theory is finding assets with lowest

correlation coefficient ρ , and by combining them in to
portfolio we can maximize return and minimize portfolio risk .
In Financial Architecture Int we asked our self’s that is the
most uncorrelated things in the world …? Well … that about human
and machine. ? We simply give machine and human equal portfolio
weights and let them trade on contra accounts … when human will
feel fear of losing money, machine will not …when human will be
greedy machine will be just the machine … when machine will buy
or sell on just signals human will always subjective and will
use his own measurements … so ρ in our case close to -1 one will
supplement another and both will increase our return „ that was
the 2nd great idea .

So we combine our self learning algorithm with experienced

trader and result was as we expected „ lowered risk and incising
return:

So we did … we combine it:

And at result we got :

This is example of 1 week of experiment:

10 transactions 10 of 10 profitable … return on investment:
Simple probability = .5*.5*.5*.5*.5*.5*.5*.5*.5*.5 = 0.009765625
less that 1% that it was by chance
Return on investment 12386.77/50000=0.2477= 24.77% a week, even
if we`ll stop trading now we already beet you market return.))

If it was chance we thought ..we cannot repeat it , so we

conduct other tests  i`ll give some examples of them :

Different account different transactions:

Durations 1 week, 11 transactions - 11 of 11 was profitable
Return: Return on invested funds 31572.71/106551.10= 0.2963=
29.63% a week
Probability that it was by chance: 0 =4.88*
And we already beat your market expected return.)

We went further and further try to check maybe we wrong and

results that we got is simply game of the chance … well it`s not
))
Now we have 20.92% return on investment with depth to equity
ration 428178.70/5000000=0.0856
We got cash flows which is easy to analyze with probability of
existence cannot simply explained by chance … by probability
theory such events should be so rare that … well let`s say that
such events and in such frequency should not exist.)

So in conclusion:

Get return better that efficient market hypothesis suggests is

possible if you have group of people who is ready and willing to
work and if you using the right tools „ours) or you free to
create your own one, the path is exist we prove it. Whom have a
years will hear.

P.S. I`m looking forward to find someone knowledgeable ,open

minded and as much as I fascinating with markets as I’m to
discuss our findings. Feel free to contact me directly.

Best regards Andrey V. Semenov

 References:

1. Markowitz, H.M. (1959). Portfolio Selection: Efficient

Diversification of Investments. New York: John Wiley & Sons.
http://cowles.econ.yale.edu/P/cm/m16/index.htm. (reprinted by
Yale University Press, 1970, ISBN 978-0300013726; 2nd ed. Basil
Blackwell, 1991, ISBN 978-1557861085)
2. Ichimoku Charts : an introduction to Ichimoku Kinko Clouds ,
Nicole Elliott Harriman House Great Britain 2007
3. World Economic Outlook ( WEO ) IMF April 2010
4. Tarashev, Niokola, Claudio Borio, and Kostas Tsatsaronis, 2009,
“The Systemic Importance of Financial Institutions,”BIS
Quarterly Review, September (Basel: Bank for International
Settlements).
5. U.S. Department of the Treasury, 2009, “Financial Regulatory
Reform: A New Foundation,” White Paper Report on Financial
Regulatory Reform, June 17. Available via the Internet: www.
financialstability.gov/docs/regs FinalReport_web.pdf.
6. Peura, Samu, and Esa Jokivuolle, 2004, “Simulation Based Stress
Tests of Banks’ Regulatory Capital Adequacy,” Journal of Banking
and Finance, Vol. 28, No. 8,
7. Kocherlakota, Narayana, and Ilhyock Shim, 2007, “Forbearance and
Prompt Corrective Action,” Journal of Money, Credit and Banking,
Vol. 39, No. 5, pp. 1107„129.
8. Brunnermeier, Markus, Andrew Crockett, Charles Goodhart, Avinash
D. Persaud, and Hyun Shin, 2009, “The Fundamental Principles of
Financial Regulation,” Geneva Reports on the World Economy
(Geneva: International Center for Monetary and Banking Studies).
9. Upper, Christian, 2007, “Using Counterfactual Simulations to
Assess the Danger of Contagion in Interbank Markets,” BIS
Working Paper No. 234 (Basel: Bank for International
Settlements)
10. Merton, R.C., 1974, “On the Pricing of Corporate Debt: the
Risk Structure of Interest Rates,” The Journal of Finance, Vol.
29, No. 2, pp. 449„70.
11. Financial Architecture Int . www.FinancialArchitecture.org